Crowdfunding industry eyes clarity on regulation and legal accountability in Budget 2022

12 months ago - January 31, 2022
In the upcoming Union Budget for FY' 22-23, Indian government is set to make big announcements for various sectors, including health, infrastructure, real estate, defence, hospitality and MSMEs(Micro, Small and Medium Enterprises).

It provides each of these sectors not just clarity, but the way forward and helps them make their strategies for the coming financial year.

The crowdfunding industry, too, is looking forward to the budget for policy changes that would facilitate their growth. There is an urgent need for a proper compliance framework and regulatory procedures for this industry to unravel its full potential. But its reach is still limited due to this lack of clarity. Millions of people and aid organizations were helped during Covid by crowdfunding. Many more can receive these benefits if the regulations surrounding financial transactions under crowdfunding can be streamlined.

Globally, the crowdfunding industry is approximately a $34 billion industry. According to a report published by BCG in July 2017, India will have more than 850 million internet users by 2025, more significant than the combined population of G-7 countries. Amongst how investment is taking place, peer to peer lending (P2P) amounts to $25 billion, donations $2.9 billion, rewards $2.7 billion and Equity Crowdfunding $2.5 billion. This has laid a fertile ground for online crowdfunding platforms to grow rapidly. Massolution's Global Crowdfunding Report expects crowdfunding to become a $300 billion industry by 2025, according to a report by Nasscom-KPMG.

Data protection regulation

In equity fundraising space in the United States, UK, Italy and Singapore, there is a very clear set of regulations for small businesses with very few regulatory hassles and robust protection for small investors opening the opportunity to even a regular middle-class person to invest based on their capacity. India will require more accountability on the part of fundraisers to ensure that their fundraising appeal is very clear akin to insurance and mutual fund companies which have to state the responsibilities and risks involved statutorily. The Indian crowdfunding industry expects simplicity and clarity from the government in equity crowdfunding regulations. It isn't easy to create regulations for charity crowdfunding. Still, given the size of the country, we need some regulations to hold the fundraisers and the fundraising agencies accountable for transparency and adhering to data protection while soliciting new donors.

Regulation and legal accountability

Several countries with a much smaller population than India have specific crowdfunding regulations in place, which has helped businesses, individuals, and charities leverage the power of the crowd for their causes, dreams, or emergencies. For people with no access to a primary mode of financing, crowdfunding is a new era fuelled by the crowd that supports them. Clarity on regulation and legal accountability will make a big difference in how this crowdfunding-powered economy will function.

Regulation for Startups and MSMEs

India has over 63 million MSMEs and approximately 3 million charities, thousands of films are being made every day and lakhs of students are waiting for access to student loans. Clear crowdfunding regulations, which are simple and can be used by MSMEs, start-ups, filmmakers, and other small businesses to solicit small affordable investments from regular people. Crowdfunding can also act as a horizontal fundraising service to all industries. Hence, a simple code of ethical charity fundraising that holds fundraisers or platforms soliciting donations online are much needed. Startups and MSMEs will be greatly benefited from such regulation, and when they expand their business, Indian economy will be benefited, and more jobs will be created.

Need of equity crowdfunding regulations in India

Equity crowdfunding has evolved as a new financing environment for ideas and breakthroughs. While some nations have made significant progress in developing equity crowdfunding systems, others are moving more slowly.

Most countries, including the United States, the United Kingdom, and Japan, have permitted equity crowdfunding platforms as an exception to general requirements for public solicitation via prospectus/offering memorandum. While some countries limit such exemptions to offers made to "accredited/informed/wealthiest" investors, others exclude solicitation conducted through a "crowdfunding platform" that limits the amount that may be raised or invested by any investor.

With the expansion of fintech businesses and new entrepreneurs, there is growth in the Indian market, and crowdfunding has expanded in India. Still, it remains silent on the regulation of equity-based crowdfunding and online-based crowdfunding. This creates a severe quandary as to what the remedy should be, given the positive role it plays in Indian society. It is important to note that the Indian market has "untapped potential," requiring suitable compliance laws and regulatory procedures.

We also recommend